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IN the last week of September, a business confidence index indicated a major dip in sentiments. However, the first week of October saw a rally in the capital market that hit one peak after another, and the KSE-100 index broke all previous records to finish the week close to 15,800 mark.

Does it means that when business tycoons feel depressed, they hit the rings, shun caution in nervousness and play more aggressively in the capital market?

No, the seemingly contradictory signals of depressed business sentiments and a rising capital market point to two factors. One, the business community is not homogenous. Therefore, depressed sentiments of one section cannot be universalised .

The survey- based index reflects the sentiments of foreign companies in Pakistan. The domestic private sector is big , in some ways more resilient and may not necessarily share the views of its foreign peers.

Two, the opinion of foreign companies is comparatively more pessimistic than that of the local firms, particularly the more visible business groups like Manshas, Dawoods, etc. The major listed companies are doing better than many others as reflected in their corporate results in sectors such as cement, banking, etc.

It would, therefore, again be wrong to conclude that medium and small businesses, mostly not listed or not even be registered with Securities and Exchange Commission of Pakistan, all share same positive or negative sentiments.

They are actually under great stress because of their dependence on the national grid for power supply that is much less than their needs, apart from a variety of other factors including the rising raw material costs and a nightmarish law and order situation. Many textile, leather, electrical, surgical and other small companies are said to be on the verge of collapse.

The sense of optimism in domestic corporate sector could be attributed to the fact that the big groups own captive power plants and access to overseas financing options. This reduces their dependence for energy on the national grid and finance requirements on local banks. The quality and quantity of domestic services in these two key areas do not necessarily limit their operations or business ambitions.

On September 26, the Overseas Investors Chamber of Commerce and Industry (OICCI), a representative body of 187 foreign companies of 33 different countries operating in 14 sectors of trade and industry in Pakistan, launched their current Business Confidence Index.

The index, based on a survey conducted at an interval of six months, gauges the confidence level of their members on different business-related matters and the state of the economy in general.

According to their findings, business sentiments dipped by nine per cent over the past six months, owing to growing concerns about energy shortages, rising crimes and inflation. On the chart, the business confidence index moved downwards from negative 25 per cent to 34 per cent.

The confidence index is the net of positive and negative responses to a variety of questions asked in the survey. According to the OICCI: “The sharp drop in the business confidence was led mainly by poor sentiments of the retail sector, where business confidence index (BCI) score went down from negative 29 to negative 48 per cent, and the manufacturing sector which also declined significantly from negative 23 to 37 per cent. This decline was partially offset by the relatively positive outlook of the service sector where BCI improved by seven per cent from negative 24 to negative 17 per cent.

Apart from increase in negativity, the current survey also records a shift in opinion of respondents from positive to neutral zone, reflected in the decline of the overall business confidence score. Interpreting the feedback, it appears that business people have now lowered their expectations from the authorities”.

Within a week of the launch of the BCI on October 2, the capital market projected to be the barometer of business confidence buoyed up.

After a gap of four years and a half, the Karachi Stock Exchange hit a new all-time high of 15,747.6 points and ended at 15,712.1 points. It
closed on October 3 at 15,788 points and declined to 15,754.39 on the last day of the week on Friday.

Many analysts found the current capital market hike more realistic and therefore sustainable than the one achieved in 2008 because of a fairly low P/E ratio that is said to be in the vicinity of seven to eight per cent, about 40 per cent less than the regional average of 14 to 17 per cent.

The P/E is price earning ratio reflecting the valuation ratio of a company’s current share price compared to its per share earnings
“The current surge in the capital market has solid grounds. It is generated by the growth in turnover and profitability as reflected in the recent corporate results and positive sentiments generated by the State Bank of Pakistan’s policy rate easing after tight monetary policy pursued for a long time”, said a commentator.

“It would be naïve to read too much in the KSE surge. Who imagined in 2007 when the stock market was hoping to move from strength to strength that it could crash the way it did. So, for me, it is a classic case of acid bubble that can burst anytime. Though, I must admit, that some of the annual results of listed companies announced recently were impressive and may partially be driving the mood”, said Dr Hafiz Pasha, a distinguished economist, who heads the panel of economists that advises the government.

Kamran Y Mirza, CEO, Pakistan Business Council, explained factors that could have lead to paradoxes in the economy.

“It is not hard to understand the anxiety of the foreign companies because of multiple challenges facing the economy down the road. Locals, I believe, are tougher also because they belong here”, he said explaining the divergence in sentiments of local and foreign business.

“For the capital market it is not fair to compare the current advance in index to the one in 2007-08. Back then PE ratio was 12 to 13 per cent, whereas, currently it is about six and a half per cent. The market, in my view, is cheap and safe. I believe we have been through the worst”, Mirza said.